Intro

Around 7 years ago I wrote “A guide to finances” which some of my friends found helpful. Now, everyone is likely at a different point in their lives, so I thought I’d write the follow-up.

General overview

Write down what your ideal life looks like and calculate how much that would cost per year. Let’s call that THE_GOAL. Once you have THE_GOAL, divide that number by 0.04 to get how much you’d need to be completely financially independent. If you’re risk-averse, divide by smaller number (0.0375, 0.035 or 0.03) instead. Once you have that amount, invest it into the market with 80% of it going to stocks, and 20% going to bonds (you can use 85-15 as well).

I’ll take questions and update this post as people chime in.

My thoughts around money

My thinking around money has changed as I’ve spent time working and built up savings. One big change is in the value of my time as I age. At the beginning of my career, an additional 10k$ had a lot of value, and I’d likely trade half a year of freedom for that extra cash. Over time, the value of that additional 10k$ has gotten lower relative to the value of my time. So, I’m willing to trade building up my savings for more time. Another change is that there isn’t much I desire in the “semi-rich” range. You start off needing money to take care of basic needs, and then some basic luxuries (like some nice possessions - a guitar or a fancier car). Beyond that, I’m not entirely sure what money gets me. There’s a big gap between achieving that lifestyle and being able to live the “super-rich” lifestyle (private jets, private staff, etc.) and I’m not sure the effort is worth the reward given the risk (of never bridging that gap).

Money and savings is in essence a foundation to allow the pursuit of other things, not the end goal in itself.

QnA: Finance-related

For some of the initial questions, I’ve used something that I couldn’t have in 2017, LLMs :)

Q: Can you provide more details on how to calculate THE_GOAL? What specific categories or expenses should be considered when envisioning an ideal life? A: I’d definitely consider the biggest expenses you’re likely to have. Housing (whether you rent or buy), car(s), vacations (budget for the level of luxury you want), and a monthly budget for food and utilities. If you plan to have kids or pets, budget for those as well.

Q: Why is 0.04 (or the other suggested numbers) used as the divisor to determine financial independence? What’s the reasoning behind this calculation? A: Great question! This comes from the 4% withdrawal rate “rule”. For over 150 years (since 1871), you can withdraw your investments at a 4% rate and almost always live the rest of your life without going bankrupt. 3% is even safer, as you’re withdrawing a smaller % of your investments. Here’s a visualization you can play around with to see all scenarios since 1871!

Q: The post mentions an 80/20 or 85/15 split between stocks and bonds. How should this allocation change as one gets closer to retirement or reaching their financial independence goal? A: Put more towards bonds as you get closer to the goal, due to the lower risk. Though the rate of return is lower, you should be working off of “fear” rather than “greed”.

Q: What specific types of stocks and bonds do you recommend for the 80/20 or 85/15 split? A: S&P (for example: VOO) for the stocks, as the earlier post mentions, and treasury bonds (T-bills) if you can buy those. If not, or you prefer simplicity, VMFXX is a good alternative.

Q: I’d like to know how much longer it’d be to reach THE_GOAL so that I can plan accordingly. Any tips? A: Use the Mustache Calc. It’ll tell you how many years till you hit THE_GOAL (financial independence).

Q: How does inflation factor into these calculations? A: You can assume an inflation rate of 3% for the calculator above. Your investments should be affected by inflation at the same rate as your expenses, so that should result in a wash. The S&P500 returns an inflation-adjusted return of 7% assuming dividends are reinvested - (link). You can assume 6% if you want to be a little safer.

QnA: Life-related

Q: How can I de-risk this further? I’m concerned about what happens in a market crash. I don’t want to be forced into retirement. A: You don’t have to retire. If you’re extremely risk-averse, you can still use this to open up options. You can leave a high-paying but mentally taxing job, for a lesser-paying but more fulfilling one. You can take a break for a few years instead of retiring permanently. You can take time off now to spend more time with your loved ones (maybe work a lower-paying remote job to enable this, for example).

Q: I’m afraid I won’t be able to upgrade my lifestyle, which I’m used to doing over time as my net worth goes up. A: If you are able to see upgrades that are worth it, I’d consider budgeting that into THE_GOAL. Another option is to live slightly below the lifestyle that your investments afford you. This actually lets you “save” more, adding to your investments, and allows you a higher-end lifestyle over time.

Q: What about healthcare? A: Hopefully you can be a dependent and obtain excellent healthcare coverage, but if not, maybe government-provided options suffice? Worst case, you’d have to maintain some kind of job that gives you the coverage you need.

Q: I can’t quit or switch to a lower-earning career because it’d be unfair on my partner. A: To make it fair(er), consider switching who gets to take a break every 3-4 years. In addition, to calculate your annual expenses, do cover all your individual expenses yourself (rather than splitting them). Discuss common (mutual, not frequent ;)) expenses and hopefully you can agree on a reasonable level of luxury both of you are happy with. It’s all about communication anyway.

Q: I’m nowhere near THE_GOAL - what’s the point of this post? A: It lets you plan better for life considering finances. Even if you’re nowhere near THE_GOAL, you can use this to understand what kind of lifestyle you can currently afford (in perpetuity) even without a job, and understanding the underlying concept/math behind the calculation hopefully lets you plan for shorter breaks to enjoy life as well.

Q: I love my job & my life, so I don’t need to bother reading this, right? A: Right, if you’re already happy & satisfied then keep doing whatever you’re doing - and maybe send a post my way! :)
And if things ever change (hopefully not), you can always read this (& other posts) then.

An LLM threw this one at me: Q: What strategies can be used to maintain a sense of purpose and fulfillment after reaching THE_GOAL, especially if one’s identity is closely tied to their career? A: I don’t really know (yet)! But, I have some half-baked thoughts that I might serve in a future post!